Question

Think of a business or organization that would use process costing. What type of waste are likely to be generated during the manufacturing process? Are there ways to avoid this waste or minimize it? How might managerial accounting support the efforts to reduce waste in the production process?

Answer 1

An example of an organisation that would use process costing would be a steel rolling mill. The various types of waste that are likely to be generated during the manufacturing process are as follows:

1. Defects: This means the material which is not saleable due to manufacturing defects during the steel rolling process. eg. misrolls, scrap, etc

2. Overproduction: This means that more material is produced than the demand for the product, which results in material lying unsold. This results is wastage of raw materials, as well as consumables, electricity, labour, etc

3. Waiting: This refers to the time when the product is lying idle either in raw material or work-in-process or finished good form. The overhead increases while the product is idle and no value is added. This could also happen due to the waiting times in between processes

4. Transport: This refers to the movement of materials from one place to another. Transport adds no value, so minimising these costs is essential.

The ways to minimise costs are:

1. Reduce waste: Better management of the plant to reduce waste products during each process. Modify production methods to eliminate scrap as much as possible

2. Efficient inventory management: Order only as much raw material as is needed to reduce overproduction. Align production processes in order to reduce waiting times between them

3. Provide warehousing facilities: Minimise costs by lining up assembly line production. Cut down transport costs by providing in-house facilities

4. Reduce packaging material: Switch to re-usable or re-cylable packaging material as much as possible in order to reduce costs. Incorporate larger bundles to reduce packing costs

Managerial accounting can help in reducing waste in by minimising non-utilised talent. The management should ensure that the talent pool of all the employees in fully utilised. They should ensure that each employee is adding value to the organisation and reduce wastages in terms of moving time or waiting time of employees. They should also motivate the employees to change for the better and to improve their productivity